Nexon, the Company That Proved People Would Pay for Virtual Items, Is Going Public

The Korean gaming company Nexon is one of the most underrated Internet companies in the world. Nexon was, it is fair to say, the first company to experience massive success with a business model built on selling virtual items. Building from their wild success with the Mario Kart-like racing game, Kart Rider, Nexon created a gaming empire first in Korea and then around Asia. This empire was unprecedented and it opened up a whole new way of thinking about making money off of gaming.

Nexon brought all kinds of different game types to the Korean market, and soon thereafter, to China both through their own efforts and through copycats. At the time, the Asian markets were considered a sinkhole by Western publishers because the retail business they depended on in the west didn't work. Instead of going into stores and buying games, piracy ran rampant and western game makers couldn't figure out how to make money. Nexon cracked the code, creating monetizable games by completely chucking the retail model that had succeeded in the west.

It should also be noted that when Nexon was doing all this stuff in the early and mid-2000s, no one was paying for anything on the Internet. Many people weren't convinced that anyone would ever
buy anything virtual on the Internet, let alone virtual items for a game*. So their success wasn't just significant for gaming but for all Internet companies. They proved that if you tuned your content right, people would pay for bits.

Still western analysts were resistant. They chalked up Asian consumers
willingness to purchase virtual stuff as evidence that they were just
fundamentally different, exotic consumers of content. Now, of course, we
know that people across the world can be induced to buy virtual items.
More than $2 billion in virtual goods will purchased in the United States alone this year. So, Nexon also proved that innovations that started out in the Asian Internet space could flow into western markets.

Techcrunch's Sarah Lacy is one of the few mainstream tech journalists who've noticed how significant Nexon is. Here's her gloss: "It has higher revenues, far better margins and dramatically better user
engagement statistics than Zynga, even if most average Western investors
have never heard of it," Lacy wrote.

In 2010, the company had revenues of 934 billion won, which works out to about $835 million. Nexon's IPO could net the company $1.3 billion, which would allow it to expand its operations considerably. This is an Internet company that should be on your radar.

* A reader reminded me that there was a black market for money in some massively multiplayer online games, which is a good point. The market, though, was fairly small and was grouped by most interested parties under the category, "Stuff Weird MMO Players Do," more than a mass market phenomenon.